Rotating Through Strong Sector ETFs

Advisors and investors still like the tactical advantages offered by sector exchange traded funds.

Although U.S. equities have struggled to start 2014, sector ETFs raked in $2.9 billion last month with health care and technology combining for $2.2 billion of that total, according to BlackRock. [ETFs Lose Almost $10 Billion in January]

“For some, sector ETFs offer a more efficient way to get exposure to parts of the market where fundamentals and valuations are, to them, more appealing than others. But investors and advisors need not go it alone, as there are ETF Investment Strategists deploying such strategies, including Main Management,” said S&P Capital IQ in a new research note.

S&P Capital IQ highlighted Main Management’s top-down view on macroeconomic factors, which facilitates increased “exposure to U.S. sectors where it sees appealing valuations and key fundamental drivers,” according to the note.

“Main’s primary focus is on an ETF’s top-10 holdings and then establishes price targets, which are rolled up to the ETF level,” according to S&P IQ. As the research firm notes, many of the largest sector ETFs are cap-weighted and the top-10 holdings in those funds account for the bulk of the funds’ weights.

Among the ETFs currently favored by Main, according to S&P Capital IQ, is the Technology Select Sector SPDR (XLK) . XLK, which is the second-largest U.S. sector ETF by assets, allocates nearly a quarter of its total weight to Apple (AAPL) and Google (GOOG). The fund is rated overweight by S&P Capital IQ. [Of Google and ETFs]

Another sector favored by Main is financial services, which the firm “sees benefitting as M&A activity is picking up, headline risk is largely in the past and dividend increases are likely,” said S&P Capital IQ.

The research firm has overweight ratings on the Financial Select Sector SPDR (XLF) , the largest U.S. sector ETF, and the iShares US Broker-Dealers ETF (IAI) . Home to discount brokers such as Charles Schwab (SCHW), TD Ameritrade (AMTD) and E-Trade Financial (NasdaqGM:EFTC), IAI has benefited as more individual investors join the rally in U.S. stocks. The fund was the best performer among financial services ETFs last year. [2013's Best Financial Services ETF]

S&P Capital IQ also has overweight ratings on the Vanguard Health Care ETF (VHT) and the Health Care Select Sector SPDR (XLV) . Health care, one of just two (utilities is the other) S&P 500 sectors to generate positive returns this year, is Main’s third favorite sector.

Earlier this year, State Street Global Advisors, the second-largest U.S. ETF sponsor, lowered the fees on the nine sector SPDRs ETFs to 0.16% per year from 0.18%. [State Street Lowers Fees on Sector ETFs]

Financial Select Sector SPDR

Tom Lydon’s clients own shares of Apple and Google.